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Off-Price Retail:
Retail's Bright Spot Explained
INTURN

Off-price retail is growing faster than any retail sector. But what is it and what makes it so successful? In this brief guide, we’ll take you through off-price and explain exactly what makes it so appealing to brands and consumers alike.

INTURN is the win-win off-price solution for brands and retailers. To find out about this new way to do off-price, read about our platform features, or find out more about our solution here.

What is off-price retailing?

Off-price is when retailers sell branded or designer items to consumers at significantly lower prices than full-price stores.

Brands have excess product that they are unable to sell at full-price (or even at a slight discount) in stores, and in order to have proper cash flow and be successful in business, they have to sell off this inventory. They typically look to off-price retailers to purchase their product at 40-60% discounts off of the wholesale price, usually taking whatever they can get for their unwanted goods. Excess inventory can occur for many reasons, such as cancelled orders, off-season product, overproduction, manufacturing errors, among other things, and is inevitable in the retail industry.

Because these off-price retailers buy product at such a low price, they can still turn a profit by selling it to consumers at significantly lower prices than those found in boutiques, department stores, and other full-price retailers.

How does off-price retail work?

Excess inventory is inevitable in retail - no matter how popular a fashion trend or how successful a particular season is, there will always be items left over that haven’t sold. This dead stock, or excess inventory, naturally poses a number of problems for businesses.

Off-price retail is essentially made possible by excess inventory in the retail market. Though businesses carry out extensive product planning to try and avoid this issue, their forecasting is generally based on previous season sales and assumptions, making final production numbers very rough. As a result, manufacturers are often faced with the issue of overproduction, leaving them in need of a way to shift this excess inventory.

Excess inventory can happen at any stage in the product cycle for a number of reasons, such as:

Economic Instability

Unpredictable
Demand for Product

Changes in Consumer Spending Habits

Purchasing Setbacks, Credit Issues

Unexpected Weather Fluctuations

Excess inventory means a loss of revenue, not only because the manufacturer will have to sell stock below MSRP, but also because excess products quickly lose value the longer they are held in stock. As demand for this stock decreases, it begins to take up shelf space that could be better allocated to newer products with higher profit margins.

Holding costs like warehousing, insurance and taxes also cut into revenue, with moving or storing excess inventory costing US retailers approximately $50 billion a year. What’s more, slow monetization of inventory affects a business’s freedom to take out loans at the best rates, further inhibiting their financial situation.

This is where off-price retailers come in. They operate by buying products from thousands of different designers, capitalising on the unpredictable nature of consumer demand and errors made in the production process by outlets looking to ensure that their stores are always stocked.

However, this is hugely beneficial for manufacturers looking to shift excess units in order to recover some of the money that would have otherwise been tied up. The amount of money regained can make all the difference to the success of the business that year and is thus essential to a working brand.

Off-price retailing is therefore made possible and acts as a solution for manufacturers.

What are the benefits of off-price retail?

With off-price retail comes many benefits to a number of different groups:

Consumers

It makes sense that consumers are big fans of off-price retailing. After all, off-price retailers sell brand name and designer products for a fraction of their original price, enabling customers to browse bargains whenever they want and eliminating the need to wait for annual sales. And for consumers, part of the original attraction is that they have no idea what they are going to end up buying when they enter the store. It’s like a treasure hunt for the best deal, price, or item.

Off-price retailers

The off-price retail business is entirely dependent on excess inventory and is thriving more than ever before, as buyers have become accustomed to discounts and enjoy hunting for the best deals available. With an ever-changing stock, off-price retailers are in a much stronger position to keep their customers engaged than traditional retailers. In many ways, the off-price retail business plan takes the volatile nature of the retail industry and converts it into a steady model for off-price retailers.

Original brand manufacturers

Off-price retail gives brands the opportunity to turn their inventory over and maintain a healthy cash flow. Since excess inventory ties up cash, the advantage to sell it to off-price retailers allows brands to hit their margins by shifting stock and recovering revenue that would otherwise be tied up in goods form.

What is the difference between off-price vs. full-price?

There are many other ways to differentiate off-price and full-price aside from the obvious cost differences.

Negotiating:

Buying timeline:

While full-price retailers buy products 6-9 months in advance of being sold in stores, off-price retailers buy products only 1-3 months in advance.

Stock:

Full-price retailers get their pick of particular styles and quantities to stock. On the other hand, off-price buyers buy whatever is left over, choosing from the remaining selection still available.

Challenges:

While full-price buyers need to be in touch with what consumers want and what items are on trend, off-price buyers need to be strategic with how they price their items to increase demand for their items.

Examples of off-price retailers

Off-price is increasingly becoming the bright spot in what used to be an unspoken sector of the retail industry. As more customers are increasingly favoring off-price, here are two of the most well-known retailers:

TJX Companies Inc.

With over 3,800 stores across the globe, TJX is the largest off-price retailer in the USA. Some of the company’s seven businesses include Marshalls, HomeGoods, T.J. Maxx and T.K. Maxx. Each of these retail chains offer off-price goods in different niches; however, all share the same brand mission of delivering good value to customers. Founded in 1976, the company is one of the best known off-price businesses in the world and boasts over $33 billion in revenues.

Ross Stores Inc.

As the second largest off-price retailer in the USA, Ross operates the chains Ross Dress for Less and dd’s DISCOUNTS. With over 1,500 stores in 37 states, Ross, while a smaller business than TJX, finds success with a similar off-price retail business model. With plans to open 80-90 stores annually over the coming years, Ross abandons the more polished finish of traditional retailers in favour of offering the best possible discounts for customers.

What are best practices for off-price retailers?

It can be difficult to know where to start when optimizing for off-price. You don’t simply want to sell your products to buyers who will purchase the most; you also want to optimize the value of your inventory to help hit your margins. Here are some best practices in doing so:

1. Updating your backend systems

While it can be easy to let this drop down the priority list, ensuring that you have a solid internal infrastructure is integral to your success. Updating legacy systems, such as your inventory management, image management, markdown optimization and invoicing/PO, is key. And it’s important that you replace any outdated processes as well as systems to ensure that you’re bringing improved visibility and structure to your inventory tracking and overall off-price business performance.

Action

Aggregate and provide all available product information to buyers in a clear, comprehensive manner in order to increase buyer confidence and purchasing prices and enhance existing relationships.

2. Determining what inventory needs to be marked down and sold

Products can reach a range of locations during their selling lifecycle as a result of unexpected returns, cancelled orders and changes in shipping processes. Poor reporting systems only worsen the situation, leading to further misjudgements over inventory levels.

Having a clear and up-to-date reporting platform is therefore essential. Take full stock of products across all wholesale, retail and e-commerce stores and ensure that you collate this information to help you locate the places where your cash is tied up in.

Action

Get all of your reporting up-to-date and aggregated for each channel of purchase to give you a clear real-time view of the inventory situation and where your cash is tied up.

3. Optimizing your buyer network

Timing is everything - a huge element of your success is finding the right buyer for your inventory in the right market at the right time. The ideal buyer isn’t always the one with the highest market demand for your product, with there being a number of other factors to consider like ease of communication and whether they have a customer base that fits with your brand.

Review your current buyers and reach out to new ones in domestic and global markets. Doing so will help you work towards your ultimate goal of selling inventory with the highest profit margin.

Action

Vet your current buyers, and reach out to new buyers in both domestic and global markets in order to sell your inventory with the highest profit margin.

4. Providing buyers with detailed product information

No one wants to blindly commit to a purchase. Detail is everything, and buyers who are purchasing items based only on a text description are likely paying a much lower price for those products because they’re not entirely sure what it is they’re buying.

Save buyers the trouble of Googling style numbers in search of more information by ensuring that your product listings include images, product descriptions, measurements, fabric content, material codes, product origin, color codes and country of origin. There’s no such thing as too much information, and providing such detail will increase buyer confidence and in turn boost your profit margin.

The proof is in the numbers - global apparel brands have seen an increase in recovery value of +50% on product listings with rich content. Multinational off-price retailers also project that they can save 100 hours per buyer per month with simpler access to inventory offers rich with product data.

Action

Aggregate and provide all available product information to buyers in a clear, comprehensive manner in order to increase buyer confidence and purchasing prices and enhance existing relationships.

5. Understanding your market demand

Offers that are curated for specific buyers in specific markets are much more likely to see products sell at a higher price as this means that buyers will also be able to sell products to their end customers at a greater price.

Determine the location and market where there is the highest demand for and lowest supply of your merchandise to allow you to sell your items for more. Through curating product listings for particular markets, multinational brands have reduced the time that off-price retailers spend on buying by 80%. Off-price retailers have bought 25% more units from these curated product listings, so it’s well worth doing your research to help buyers out!

Action

Find the location and market where there is the highest demand for and lowest supply of your merchandise in order to sell your products at the highest price.

6. Supporting a robust internal communications system

It might sound obvious, but strong internal communication is the key to your off-price success. Transparency and internal oversight allows for better management, informed decision-making and more efficient processes.

Employees spend 2.5 hours (over 30%) of their workday looking for existing company information. Optimise your work efforts by supporting a strong internal communication system. Collaborating saves time and money, streamlining processes and helping you turn over more inventory.

Improve teamwork and internal insight in order to create a streamlined and efficient process for turning over your inventory.

Off-price vs. Amazon: Who will win?

With the rise of huge ecommerce sites like Amazon, many have attributed the increasing closures of brick-and-mortar stores to the expansion of online retail. However, amidst the shutting of familiar department stores, off-price continues to thrive and is often hailed as retail’s bright spot.

Off-price retail has a number of key differences to department stores in its business structure, and it is due to these core differences that Amazon cannot compete with its success. While Amazon’s ‘Prime Wardrobe’ seeks to better cater to the retail sector, this is more similar to a department store’s online offering in terms of pricing structure and its fashion focus. Amazon’s move in this direction seems to be based on the fact that the department store structure is much more straightforward to replicate than the off-price model.

In contrast to the department store business plan, the defining ‘treasure hunt’ style shopping experience provided by off-price is much more difficult to recreate. Speaking on the topic, Ross Stores COO Michael O’Sullivanreinforces this idea, stating that "Doing a treasure hunt online is much more hit or miss, because you are not actually seeing — or you're seeing it, you're just not experiencing the product in a same way that you would if you were in a store”. As O’Sullivan explains, it is this key difference in business structure and how shoppers engage with this retail offering which means that off-price isn’t likely to be at risk of being beaten out by Amazon any time soon.

Why off-price is thriving while department stores close

While off-price continues to flourish, it is not without an impact on other parts of retail, namely, department store chains. While JPMorgan predict growth that is expected to result in up to $19 billion sales for off-price by 2021, this expansion will likely come at the expense of department stores, who are thought to have lost out on a combined $25 billion in sales since 2011.

With 2017 setting the all time record for store closures, it is clear that brick-and-mortar is struggling. Yet, at the same time, off-price retailers are announcing ambitious new store openings, with TJX CEO Ernie Herrman confirming plans for a Homesense expansion across the US involving 15 new locations set to open by February 2019. As if that weren’t impressive enough, Herrman also announced that a further 85 HomeGoods stores will open over the next year. Clearly, it’s a good time to be in off-price.

The unique business model of off-price has proven to be a hit with consumers, and it is looking increasingly likely that this sector will become the main beneficiary of brick-and-mortar sales volume. In a world of fleeting fashion trends and unpredictable weather fluctuations, off-price is able to cater to a range of needs without enduring the lengthy department store process of buying clothes from sellers months before clothes are due to arrive in stores. In contrast, the off-price model is adaptable to changing needs while having proving an effective structure to keep customers engaged, allowing them to browse bargains without having to wait for sales season.

What is the future of off-price retail?

Off-price is growing faster than any other retail sector, with chains like T.J. Maxx, Ross and Burlington seeing consistent growth using this ‘treasure hunt’ style business model. With over 16,000 brands taking part in the $3 trillion global retail market for apparel, footwear and accessories, excess inventory is an inevitable part of the industry, and off-price is flourishing from this.

Increasing department store closures present a strong opportunity for off-price retailers to continue gaining market share, protected by their ‘more value for less’ business structure. Though off-price retailer Burlington saw top-line growth of 9% in fiscal 2016, department stores like Macy’s actually had sales declines of 4.8%. Off-price is constantly hailed as the future of retail, with the model meeting rapidly changing consumer tastes and customers having become accustomed to the low prices on designer brands.

"I believe we will start to see a moderation of growth in the off-price sector, mainly given the large number of stores being opened and the growing intensity of competition. A strong economy may also cause more customers to "trade up" to more expensive product offerings." - Steven Dennis

“Consumers today not only look for a bargain, they're looking for an immersive experience. The treasure hunt experience that the off-price model offers has led two-thirds of all shoppers to their stores. Off-price gives shoppers the opportunity to find the latest trends and brands they know and love at an attractive price. Consumers love to share the great deal they found with family and friends. This excitement encourages others to hunt for a great deal. We are confident that the off-price sector will continue to thrive, evolve and increase their footprint worldwide.” - Katy Albrecht, www.offpriceshow.com

If off-price’s success until now is anything to go by, the future is bright. Consumers appreciate the value for money on branded products, with the constant discounts meaning that customers feel less inhibited with their spending. The ever changing stock and excitement of finding a bargain play a huge part in off-price’s appeal, with continued growth in the sector seeming inevitable.